Tag Archives | vendors

Broken Debt Covenants?

It’s almost that time again…  quarterly debt covenant reporting.  Is your company going to have some explaining to do?  If so, you’re not alone.

Banks generally set 3-4 key covenants on their loans.  These covenants serve as “tripwires” that alert the bank to potential trouble ahead.  Most companies don’t bust all of them, but many find themselves out of compliance with at least one of them at times.  This is particularly true in a soft economy like we’re seeing in Houston these days.

The most common broken debt covenant we see in this environment is the Debt Service Coverage Ratio (DSCR).  Mathematically, DSCR equals:

DSCR=EBIT/(Interest +(Principal/1-Tax Rate))

In English, DSCR is equal to Net Operating Income divided by the cost to service the company’s debt.  It basically measures your company’s ability to make its debt payments.  You can see why this covenant is especially important to your banker

Impact of Broken Debt Covenants

What does it mean to have broken debt covenants?  Worst case, the bank can call your loan.  Generally speaking, banks don’t want to do this, especially if it’s not part of a troubling pattern for your company.  The more likely scenario is that your credit line could be frozen and your company will need to start surviving off only the cash flow generated from operations.

If you find yourself in the situation described above, don’t panic.  By making a few changes, your company can free up cash flow to get a little breathing room until things turn around.  Here are a few examples:

Ask key vendors to stretch their terms – Your vendors don’t want to own your company.  When cash is tight, most vendors will work with you if you as long as you are willing to make regular payments, even if it’s not by the due date.

Have a designated collections person – Nobody likes making collection calls, so unless collections is someone’s job, it’s no one’s job.  Having a dedicated collections person ensures that customers are paying within terms or have made arrangements to pay out past-due invoices, ensuring that your business has the cash to fund operations.

Invoice immediately – It may not seem like much, but getting your invoices out even a couple of days sooner can free up a considerable amount of cash.  Make sure you get them out right away and that they are clear and easy-to-read to avoid payment delays.

Looking for more ideas to help free up cash?  Click the link below to download our free list 25 Ways to Improve Cash Flow.

broken debt covenants

broken debt covenants

Share this:
0

Should You Pay Attention to Economic Indicators?

An article published recently in the Journal makes the case that smaller companies should pay attention to certain economic indicators, such as the Producer Price Index (PPI), unemployment rates, and consumer confidence. Yet most smaller companies take what the market will bear, and sell and buy in markets which are impacted by much more narrow factors than the general economic environment. Not to mention that many of these indicators are lagging indicators rather than leading.

Should You Pay Attention to Economic Indicators?

Not that looking for signs of what’s to come is necessarily without value for your business. What I took from the article is that it is important to know what drives your business. Also, it is important to review the pricing of your products and/or services, as well as that of your vendors.

Still, it is worth your while to know how your company makes money. Which factors drive your earnings? How does operational performance connect with your profitability? Knowing the economics of your business is important in improving your profits and cash flow. What is your gross profit margin percentage? How much can you increase profits through a price increase versus through an improvement in productivity? Perhaps once you know your P&L statement inside and out and maximize the factors that impact that the most will it be worthwhile to consider the indicators that the popular business press bombard us with abandon.

If you want to find out more about how you could utilize your unit economics to add more value, then click here to download the Know Your Economics Worksheet.

economic indicators

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

economic indicators

Share this:
0

LEARN THE ART OF THE CFO